| Once upon a timeOnce upon a time, many
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| | be supportable on low turnover
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| years ago there was a young, ambitious
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| | items.- Integrity of customer. No matter
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| salesman selling flat rolled steel. This
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| | how thorough your consignment agreement,
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| energetic young man called on one
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| | all such programs involve a high level of
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| potentially large account for months and
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| | trust between parties. How easy are they
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| months with zero success. He was going
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| | to do business with?It is very important,
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| nowhere fast. The only thing he got from
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| | then, to complete a diagnostic review.
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| the rather large, burly looking
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| | The diagnostic review, initiated by your
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| professional purchasing agent was
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| | sales support team, is the first step in
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| frustration. The purchasing agent knew
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| | preparing for consignment. The review
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| the young salesman was short on
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| | involves your entire organization and
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| experience. The young salesman felt that
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| | represents a complete and thorough
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| the purchasing agent actually enjoyed
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| | assessment of the customer's current
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| watching him squirm month after month.
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| | operating environment. It provides the
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| This young salesman, being enthusiastic
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| | base of reference for all future
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| and energetic, tried every sales
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| | consignment activities. It is primarily a
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| technique he had ever learned. Of course,
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| | data collection and operational analysis
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| the scruffy old purchasing agent was
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| | effort which defines the consignment
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| familiar with every one of them and had
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| | opportunities and the challenges that
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| seen them many times before. Nothing
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| | must be met for implementation. It
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| seemed to work on this guy. The young man
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| | includes an assessment
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| just couldn't reach him. So, he went back
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| | of:- Operations- Material Flow- Material
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| to something very basic that most of us
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| | Storage- Organization- Market
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| in sales (especially we Baby Boomers)
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| | RequirementsThe diagnostic review results
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| learned from day one. The young salesman
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| | in a thorough understanding of the
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| reflected on the words spoken by his most
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| | barriers, constraints and opportunities
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| cherished mentor, "Build a relationship
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| | to implementing the consignment
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| son. Get the man to like you and he'll
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| | partnership. It provides the baseline for
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| tell you how to do business with
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| | assessing improvement opportunities and
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| him."ExpectationsWell, the young man
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| | for developing the consignment strategy.
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| tried and tried, but even that didn't
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| | Failure to perform the diagnostic review
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| seem to work. He was ready to give up. He
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| | significantly reduces the probability of
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| was tired of repeatedly hearing that same
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| | success for consignment implementation.
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| pathetic purchasing agent's theme song,
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| | This can often negate any cost savings
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| "I'm happy with my current suppliers."The
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| | generated by the concept itself.Once an
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| young salesman was not smart enough, did
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| | account is determined eligible and the
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| not have enough scar tissue and was not
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| | diagnostic review has been completed,
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| confident enough to reply, "Maybe that's
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| | further development of the rules of
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| because you have set your expectations
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| | engagement include:- Minimum turn
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| way too low." Instead he resorted to his
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| | rate- Number of items to be
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| secret weapon, his rarely used prideful
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| | consigned- Stocking location- Who will do
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| technique that only came out when all
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| | the count- How damaged goods will be
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| else failed - He begged. "Mr. Customer,
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| | handled- What the replenishment cycle
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| is there anything I can do, anything at
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| | will be- What the billing procedure will
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| all that will convince you to give me a
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| | be- What the billing cycle will beOther
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| chance to do business with you?"Have you
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| | criteria that is specific to the customer
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| ever been in the midst of a sales
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| | in question should be added to this
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| presentation and feel a knockout punch
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| | list.JIT on SteroidsConsignment
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| land on your chin? Well, that's how the
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| | partnerships act like Just-in-Time
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| reply felt to the young salesman. "Look,
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| | programs on steroids. They provide all
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| we have a partnership with our current
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| | the benefits of Just-in-Time without the
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| supplier. The only way you could ever do
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| | high transaction cost, purchasing
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| business with me is if you gave me our
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| | management stress and risk of stock
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| steel for free," the purchasing agent
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| | outs.It is extremely important to get as
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| barked.
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| | much specific information as possible
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| The young salesman was devastated; He
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| | directly from the customer. When you do
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| saw the thrill of victory vanish before
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| | your "cost savings analysis" and your
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| his eyes, as he tasted the agony of final
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| | "price is not the same as cost
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| defeat. He walked away from that call
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| | demonstration," you will face less of a
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| with his tail between his legs.
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| | challenge if the bulk of your information
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| The young salesman was down and
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| | comes from the customer, thereby
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| depressed. He was in one of those typical
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| | increasing their perceived accuracy of
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| valleys anybody who is or has ever been
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| | your assumptions.The following
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| in sales recognizes. The best way to pull
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| | information is critical to the success of
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| ourselves out is to make a buddy call - a
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| | your sales presentation. Your objective
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| call on one of our best customers, based
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| | is to get as much accurate information as
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| not on revenue but on friendship; one of
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| | possible from the customer. That
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| those frequent calls we make and get
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| | information should include:- Average
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| criticized for making because the sales
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| | volume of purchases on items being
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| volume doesn't justify the number of
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| | considered for consignment- Average
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| times we visit."He was a friend," the
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| | inventory of purchases on items being
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| young salesman thought. So he told him
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| | considered for consignment- Average
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| the story. His friend and customer was
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| | number of turns on items being considered
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| sympathetic, understanding and even
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| | for consignment- Average cost per
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| though he didn't offer any advice, the
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| | transaction (Customer generally doesn't
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| young salesman recaptured his spirit.
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| | know the answer to this one, but use
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| That night as he sat on his front porch
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| | whatever number he guesses. Industries
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| reflecting on the day, he thought, "Why
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| | average between $30 per transaction to as
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| not? Why not give him our product for
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| | high as $85 per transaction.)- Annual
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| free?" Full of excitement, the next
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| | average inventory write-offs- Cost of
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| morning he went directly to his boss, the
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| | cycle counting- Cost of annual physical
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| owner of the small privately held
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| | inventory including
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| company. He convinced the owner of the
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| | reconciliation- Number of stock outs per
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| integrity of his new plan.A concept was
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| | year and cost of a stock out
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| bornThe concept of consignment in steel
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| | If your customer can't answer these
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| distribution was born. That happened in
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| | questions, try to help them come up with
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| the mid 1980's. Consignment was already
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| | their best guesstimate before you resort
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| being used in the fastener industry but I
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| | to using industry estimates. The idea is
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| do not recall anybody in the steel
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| | that it is difficult for the customer to
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| distribution industry using it. But, as
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| | challenge a number that they
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| we, the young salesman and me, his boss,
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| | created.Consignment BenefitsConsignment
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| found out, the concept of consignment can
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| | benefits, pure and simple, equate to cost
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| work in any industry. It was a tough
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| | reductions. These cost reductions
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| sell, not so much to the customer, but to
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| | include:
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| me as his boss. But, we did it and it was
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| | - Reduction or redeployment of
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| successful. The prospect this young
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| | personnel- Reduction of transaction
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| salesman almost walked away from became
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| | costs- Reduction of handling
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| our largest account, purchasing over $4
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| | costs- Reduction of insurance
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| million by the end of the second year. It
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| | costs- Reduction of inventory
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| became a learning experience for both of
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| | taxes- Vendor consolidations- Reduction
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| us and we both profited from it. And the
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| | of interest costs- Elimination of
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| large burly looking purchasing agent
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| | opportunity costs- Elimination of
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| actually did become one of the young
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| | stockoutsA primary objective of
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| salesman's closest friends.Consignment
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| | consignment is to reduce the customer's
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| can become a very effective marketing
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| | cost of carrying inventory. This includes
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| tool if it is used correctly. The
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| | the cost of money, shrinkage, taxes,
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| emphasis is on using it correctly. A
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| | handling and storage. Typically, these
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| consignment partnership should not be
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| | handling costs range from 18-30% of the
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| considered without establishing specific
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| | average inventory value.Additional
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| criteria for selecting appropriate
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| | benefits to the customer
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| accounts up front. This is extremely
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| | include:- Flexibilityo Material is always
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| important to you, the supplier. We call
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| | in stock at no cost until the material is
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| this selection criteria the "Rules of
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| | released for production. Quantities
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| Engagement."In contrast to the normal
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| | available can be altered to meet peak
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| Rules of Engagement in selling,
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| | demands as well as downturns.- Reduction
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| consignment Rules of Engagement are
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| | of dollar investment in
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| predetermined by the supplier, not the
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| | inventoryo Consignment partnership
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| customer. Of course, the rules can be
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| | provides an alternate use of capital and
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| modified with proper approval to fit
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| | customers will not be invoiced for
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| different situations. However, a
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| | material until released for production.
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| consignment partnership must be a win-win
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| | It also provides emergency safety stock
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| relationship in order to be
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| | for production with no inventory
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| successful.Rules of EngagementThe
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| | investment cost.- Shorter lead
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| specific criteria that need to be
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| | timeso Normal lead times would be
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| determined before a consignment
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| | approximately 1-2 days, however, the
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| partnership is offered include:- What is
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| | consignment partnership eliminates lead
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| the minimum annual sales volume you are
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| | time as material is always in stock and
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| willing to accept?- What are the minimum
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| | available at the customer's
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| annual gross margin dollars you are
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| | plant.- Assures growth
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| willing to accept?- Are financial
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| | opportunityo Consignment partnerships
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| statements available for your review?- Is
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| | provide the availability of consistent
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| the customer financially secure?- How
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| | quality. Quantities and pricing are not
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| much risk/investment are you willing to
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| | subject to restrictions based on changing
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| accept in off-site customer
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| | market conditions. Consignment
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| inventory?Answers to these preliminary
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| | partnerships enable us to effectively
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| questions need to be established in
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| | manage the supply chain, thus ensuring
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| addition to others that may pertain to
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| | the lowest total cost.- Pricingo Pricing
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| your product and industry.An Assessment
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| | will be consistent regardless of quantity
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| of the Consignment PartnershipEven today
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| | used. (No Extras) The price for one item
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| in many industries, consignment is on the
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| | is the same as the price for 100
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| leading edge of custom designed cost
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| | items.- Vendor reductiono Reducing the
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| reduction programs. Initiatives focus on
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| | number of vendors, consolidating sizes,
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| total cost, not price, in order to move
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| | parts, communication and administration
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| to the next level of partnering,
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| | can contribute to overall cost reductions
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| surpassing expensive JIT programs that
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| | - substantial reduction in debits and
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| have high administrative costs and
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| | credits.- Generalo The intent of this
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| service risks.
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| | program is designed to offer overall cost
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| The major objective of a consignment
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| | reductions, flexibility in scheduling,
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| partnership is to reduce costs by
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| | improved cash flow, reduction in
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| eliminating inventory and duplicate
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| | inventory and investment, assured growth
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| effort, as well as reducing shrinkage and
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| | opportunities and to enhance long-term
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| lowering transaction and handling costs.
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| | vendor relationships.This results in the
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| It is also effective in reducing scrap,
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| | true meaning of partnership, a win-win
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| rework, equipment downtime, lead-time and
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| | relationship. A customer may ask the
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| over production.As consignment becomes
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| | question, "How can you provide all these
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| recognized in the marketplace as the "way
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| | services without charging a substantial
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| of the future," caution should be
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| | premium on pricing?" The answer is
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| exercised due to the lack of experience
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| | simple. Consignment is a partnership that
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| and misconceptions by the
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| | provides benefits to both parties. Your
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| competition.Misconceptions include:1:
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| | benefits as a supplier include:- Locking
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| Consignment is a Supplier Program
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| | out competition- Better control of
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| Consignment does not start with a
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| | inventory- No warehouse space required
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| company/supplier seminar where you ask
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| | for growth- Regularly involved at
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| the customer how much he wants to stock
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| | customer location- First chance at new
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| on his floor. Consignment is complex,
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| | opportunities- Hard to cancel - hard to
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| requiring supplier professional
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| | duplicate- Customer becomes supplier
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| expertise, state of the art technological
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| | dependent- Free storage space at the
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| MIS and a true commitment of a joint
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| | customer's facility
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| partnership throughout both
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| | Happy Ending?We started this article in
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| organizations.2: Consignment is Just
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| | storybook fashion. Consignment may sound
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| Another Program/Project
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| | like the "Knight in Shining Armor," the
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| Because consignment is a total
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| | "Magic Bullet," or the answer to cracking
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| organizational philosophy on both the
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| | your toughest challenge. Be cautious. Not
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| customer's part and the supplier's part,
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| | every story has a happy ending. You can
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| implementation extends beyond the
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| | hurt yourself with consignment.
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| purchasing department. Consignment
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| | Consignment is a serious program that
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| requires organization, education and
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| | requires serious investment of assets and
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| training, especially with front line
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| | resources. Make sure you do your homework
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| supervision and labor on the shop
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| | in the beginning. Consignment is not
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| floor.3: Consignment is Easy and Can be
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| | right for every account. It should be the
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| Implemented Quickly
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| | exception, not the rule. But, if it's
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| Consignment is not easy although
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| | done right, it can be the "Knight in
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| consignment customers may think so.
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| | Shining Armor." So, if you've done your
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| However, you can make it easy because of
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| | homework and all the pieces fall into
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| your years of experience, expertise and
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| | place, go for it. And, when that
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| support from your IT department.
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| | purchasing agent says to you that he's
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| Consignment requires organizational
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| | happy with his current suppliers, don't
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| change and, in some cases, physical plant
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| | be afraid to look him in the eye and,
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| changes. Cultural transition barriers can
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| | without cracking a smile, reply very
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| extend the process. Sustaining the
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| | slowly..."Maybe that's because you have
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| continuous improvement philosophy of
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| | set your expectations way - too -
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| consignment is critically dependent on
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| | low!"Dr. Eric "Rick" Johnson () is the
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| organizational transition.Implementation
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| | founder of CEO Strategist LLC. an
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| of consignment requires a plan, an
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| | experienced based firm specializing in
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| implementation team, a commitment from
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| | leadership. CEO Strategist LLC. works in
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| both parties and staying power to build a
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| | an advisory capacity with company
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| partnership seeking continuous cost
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| | executives in board representation,
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| savings.How do you know if consignment is
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| | executive coaching, team coaching and
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| right for a particular account?First,
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| | education and training to make the
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| determine which accounts may or may not
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| | changes necessary to create or maintain
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| be eligible for consignment. At a
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| | competitive advantage. You can contact
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| minimum, you should consider the
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| | them by calling 352-750-0868, or visit
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| following:- Financial stability. Since
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| | for more information.Rick received an MBA
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| consignment involves the physical
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| | from Keller Graduate School in Chicago,
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| transfer of inventory to your customer's
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| | Illinois and a Bachelor's degree in
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| location before he has paid, you should
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| | Operations Management from Capital
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| be sure that he will remain solvent
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| | University, Columbus Ohio. Rick recently
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| throughout the program. Financial reports
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| | completed his dissertation on Strategic
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| are the preferred method of validating
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| | Leadership and received his Ph.D. He's
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| stability.- Minimum level of revenue
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| | also a published book author with four
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| desired. This needs to be determined to
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| | titles to his credit: "The Toolkit for
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| justify the investment not only of
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| | Improved Business Performance in
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| inventory, but of other resources to
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| | Wholesale Distribution," the NWFA & NAFCD
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| manage the program.- Minimum volume level
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| | "Roadmap", Lone Wolf-Lead Wolf-The
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| on items. The consignment program
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| | Evolution of Sales" and a fiction novel,
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| involves a level of overhead that may not
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| | "Shattered Innocence.
|
